Individual Income Tax

A Guide to Understanding Income Taxes

An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. Individual income taxes are the largest source of tax revenue in the U.S.

Individuals in the top tax bracket also pay social security contributions or payroll taxes. These are typically flat-rate taxes levied on wages and are additional to the tax rate on income.

Individual Tax Forms

States take approaches to tax single and married couples.

Schedule A (Form 140)

Itemized Deductions

Schedule B (Form 140)

Interest and Dividend Income

Schedule C (Form 140)

Profit/Loss from Business

Schedule D (Form 140)

Capital Gains/Losses

Schedule E (Form 140)

Rental and Royalty Income

Schedule F (Form 140)

Profit or Loss From Farming

How Individual Income Tax Work?

In the United States, individual income taxes are levied at the federal level as well as in most states. Many countries around the world also levy individual income taxes.

The U.S. income tax is progressive, which means that tax rates increase as taxpayer income increases. The U.S. levies income tax rates ranging from 10 percent to 37 percent that kicks in at the specific income thresholds outlined below. The income ranges for which these rates apply are called tax brackets. All income that falls within each bracket is taxed at the corresponding rate.

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The Primary Source Of Government Revenue

Compared to the OECD average, the United States relies significantly more on individual income taxes than other developed countries. While OECD countries on average raised 23.9 percent of total tax revenue from individual income taxes in 2018, in the U.S., individual income taxes (federal, state, and local) were the primary source of tax revenue at 40.72 percent, a difference of almost 17 percentage points.

Levy Individual Income Taxes

As of 2020, 43 U.S. states also levy individual income taxes. Forty-one tax wage and salary income, while two states—New Hampshire and Tennessee—exclusively tax dividend and interest income.

Of those states taxing wages, nine have single-rate tax structures, often called a “flat tax,” with one rate applying to all taxable income. Conversely, 32 states and the District of Columbia levy graduated-rate, progressive income taxes, with the number of brackets varying widely by state. Hawaii has 12 brackets, the most in the country. Some deductions, you can claim as a taxpayer:

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